7/19/2015

Headline July 19,2015/ To McDonald's

"' TO MCDONALD'S "' :

[IN URGENT FIX].

MCDONALD'S has reported gloomy earnings, warning of fewer customers around the world and striking a stark contrast to the booming fortunes of fast casual restaurants like Chipotle that are sapping the Golden Arches

The company said that diluted earnings per share for the first quarter plunged 31 percent from a year earlier, to $0.84, far below the $1.06 a share forecast by analysts surveyed by Thomson Reuters.

Revenue fell 11 percent from a year earlier, to $5.96 billion, compared with analyst forecasts of $6 billion.

Since taking the helm at McDonald's Steve Easterbrook has already unleashed a flurry of changes:

Simplifying offerings at its roughly 14,000 restaurant across the United States, introducing premium sirloin burgers and promising to limit the use of antibiotics in chicken.

Mr Easterbrook said that McDonald's was preparing to introduce more new permanent and limited-time-only items and that finding a balance between adding to menu boards while keeping them simple enough to be replicated at its 36,000 restaurants worldwide would be critical.

"If we lurch too far one way and streamline it, we don't have enough excitement," he said. But if McDonald's leans too much the other way, "it becomes a little frenetic."

The United States market remains especially difficult for McDonald's. Comparable sales fell 2.6 percent, and the chain attributed this to product and promotional offers' not to overcoming competitive pressures.

Operating income in the home market dropped 11 percent because of weak sales, as well as the costs of restructuring and closing underperforming restaurants.

McDonald's woes extend overseas, where it has suffered from supply issues and a food safety scandal in Asia, as well as the lingering effects delays at the West Coast ports that held up shipments of potatoes this year.

The chain said that comparable sales in the Asia Pacific region fell 8.3 percent, weighed down by wide spread "consumer perception issues" in Japan, and sales in Europe fell 0.6 percent.

McDonald's decided to close about 350 underperforming restaurants last quarter, primarily in the united States, China and Japan, on top of another 350 previously planned closings worldwide, the company said in its release.

That led to $73 million in asset writeoffs, part of $195 million dent to the operating income that also included $39 million in restructuring charges.

McDonald's also faces rising costs. Responding to a tighter job market and in labor campaigns, Mr Easterbrook has moved to raise the pay of workers in 1,500 outlets it directly operates in the United States to at least $1 above the local legal minimum wage.

The decision affects only about 10 percent of all the workers at its outlets, or 90,000 of 840,000 workers, since the bulk of the restaurants are run by franchisees.

Analysts said that those stores would nevertheless be pressured to raise their own wages to compete for workers.

While the wage bump is a small victory for the fast-food workers, McDonald's weak sales, coupled with rising costs and demands for better service, have strained an already troubled relationship between the chain's corporate headquarters and its franchisees.

Some weeks ago, the financial advisory firm Janney Montgomery Scott released results of its latest survey of a handful of McDonald's franchisees, and said they appeared to be in a particularly foul mood.

"Their six-month outlook for the U.S. businesses was the worst in the more than 11 years that I've been doing this survey," said Mark Kalinowski, the investment analyst who does the research, based on 32 respondents, who own 215 McDonald's restaurants in the United States.

"I can see where they're coming from," he said. "Sales are going down, food costs are going up, health care costs are going up -and they're being asked to invest more in the business."

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